Australia Monetary Policy

Australia: RBA holds rate at record low in December

December 2, 2014

The Reserve Bank of Australia (RBA) left the cash rate unchanged at the record low of 2.50% at its 2 December meeting. The decision was expected by the market. The RBA has left the cash rate unchanged since August 2013. The Bank decided to keep the rate at its current level because the accommodative monetary policy stance, “is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target.” The Bank restated as in its prior statements that, “the most prudent course is likely to be a period of stability in interest rates.”

The Bank’s accompanying statement mirrored the previous release. Concerning the global economy, the RBA acknowledged that, "financial conditions remain very accommodative,” and that, “long-term interest rates and risk spreads remain very low.” In addition, the Bank commented that global monetary policy differences are affecting markets, specifically exchange rates. The Bank stated that China’s growth has generally been on target, however, “weakening property markets there present a challenge in the near term.”

In regard to the domestic economy, the RBA maintained that moderate economic growth is occurring, however, “resources sector investment spending is starting to decline significantly.” Accordingly, the Bank expects that economic growth will be below trend for the upcoming quarters and that Australia’s high unemployment rate will persist. As in the previous statement, the RBA added that public spending is, “scheduled to be subdued,” which is consistent with the government’s fiscal position.

The Bank said that credit growth is moderate, however lending to housing investors has picked up. It also added that the exchange rate has traded at relatively lower levels, but still remains relatively high compared with estimates of its fundamental value. The Bank stated that, “a lower exchange rate is likely to be needed to achieve balanced growth in the economy.” The RBA maintained its expectations regarding inflation, which are projected to be consistent with its 2.0% to 3.0% target over the next two years.

FocusEconomics Consensus Forecast panelists expect the cash rate to end 2014 at 2.50% and to rise to 2.94% by the end of 2015.

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